July 20 (Bloomberg) -- Rules designed to cut off federal
aid to institutions whose students struggle the most to repay
government loans were challenged by an organization representing
for-profit colleges.

A lawsuit attacking so-called gainful employment measures
was filed today in federal court in Washington by the
Association of Private Sector Colleges and Universities, or
APSCU. The rules set benchmarks that educational programs must
meet to remain eligible for government grants and loans, which
can constitute as much as 90 percent of their revenue.

For-profit colleges allege the standards “emerged out of a
notoriously flawed regulatory process” and are premised upon
incomplete and unreliable data that will punish programs for
“outcomes achieved by students” before the regulations were
adopted.

“By issuing the Gainful Employment regulations, the
Department of Education has clearly exceeded its statutory
authority,” Brian Moran, the group’s interim president and
chief executive officer, said in an e-mailed statement. “Adding
complexity not clarity, the department’s unlawful regulations
will hurt students and jobs.”

Congress and state attorneys general are investigating
education companies’ recruitment practices and use of government
aid, which totaled $30 billion last year. The Education
Department developed the rules to try to curb loan default rates
at for-profit colleges that are twice as high as at public
institutions, and three times as high as at private nonprofit
colleges.

‘Exploitative’ Programs

The regulations seek to ensure that for-profit college
graduates get jobs that allow them to repay student loans. The
aim is to protect students from “exploitative” college
programs that leave them with government-backed debt they can’t
repay, the Education Department said.

“Our regulations offer students and taxpayers the
protection they deserve,” Justin Hamilton, a spokesman for the
Education Department, said in an e-mail. “These student
safeguards rest on a sound legal foundation.”

The rules also apply to state and private nonprofit
colleges that offer career-training certificates. No more than
1 percent of those programs are expected to lose eligibility,
according to the government.

Under the rules, programs would remain eligible for federal
aid if they meet at least one of three tests in a given year: at
least 35 percent of former students are repaying their loan
balance; yearly educational-debt payments of typical graduates
account for a maximum of 12 percent of their total income; and
those payments account for no more than 30 percent of their
discretionary income.

Programs would have to fail all three tests in the same
year for three out of four years before losing aid eligibility.
The first year that could happen is 2015.

The case is Career College Association v. Duncan, 11-cv-01314, U.S. District Court, District of Columbia (Washington).